The current regime in the White House and Congress has provided ever increasing pressure on the economy by it’s actions, among them the 2017 tax act and the trade war. As it happens, recent increases in the national debt is pushing us toward a crisis. Whenever crises happen, people for scapegoats. Some would have you believe it’s caused by Social Security, with help from Medicare.
Since before 1935 when it was enacted into law, Social Security has been a convenient boogey man. It’s popular, worth many trillions of dollars, and from inception, was conveniently labeled as a “socialist experiment”.
85 years have passed and the “socialist experiment” has become an integral part of our country’s genetic code and value system. No one is going to successfully cause it to go away or be seriously threatened without causing massive financial pain across the country. Which in turn implies political pain for the proponents of that pain.
So here are ten facts that may or may not be new to you, but are nevertheless relevant as the discussion flows among the candidates for next year’s general election. They appeared on the Motley Fool on August 4, 2019, written by author Sean Williams.
(As per Wikipedia, “The Motley Fool is a multimedia financial services company that provides financial advice for investors through various stock, investing, and personal finance services.” I think of them as a reliable source of Social Security information.)
Our nation’s most successful social program, summed up by 10 numbers.
1. $1 trillion in revenue per year
First of all, you should understand just how massive the Social Security program has become. Last year, Social Security generated $1 trillion in annual revenue for the first time in its history, with the bulk of this income ($885 billion) deriving from the 12.4% payroll tax on earned income. The remainder came from the taxation of Social Security benefits (which I’ll touch on a bit later on), and interest income earned on the program’s nearly $2.9 trillion in asset reserves. These asset reserves are invested in special-issue federal bonds that earn interest.
2. 22.1 million people kept out of poverty
Social Security has proven to be an incredibly effective tool at keeping seniors, as well as the long-term disabled, out of poverty. An analysis from the Center on Budget and Policy Priorities found that 22.1 million people were being kept out of poverty each year solely as a result of their Social Security payout, including over 15 million retired workers. Without a monthly Social Security payout, the elderly poverty rate would more than quadruple to over 40%.
3. Your full retirement age (probably 67)
It’s also imperative that workers know their full retirement age (FRA). Your full retirement age is the age at which the Social Security Administration deems you eligible to receive 100% of your monthly benefit, as determined by your birth year. Claiming benefits before your FRA means accepting a permanent reduction to your monthly payout, whereas claiming after your FRA can actually increase your monthly benefit above 100%. Most future retirees will have an FRA of 67 years, although you can find your unique full retirement age with this handy Social Security Administration table.
4. $1,471 average monthly benefit
You should understand that Social Security isn’t going to have you rolling in dough. The average retired worker was bringing home $1,470.83 a month, as of June 2019. Although this works out to more than the federal poverty level on an annual basis, the grand total for a full year is “only” $17,650, when rounded. As you’ll see in the next point, it’s not designed to be a primary source of income.
5. 40% is the expected wage/salary replacement level
According to the Social Security Administration, your retired worker payout is designed to replace about 40% of your working wages or salary. Although this percentage could be a bit higher for lower lifetime income workers, and lower for more well-to-do workers, the point is that Social Security benefits aren’t expected to be more than a secondary source of income. In other words, Social Security income doesn’t take the place of your need to save and invest for the future.
6. 62% of retired workers lean on their payout for at least half of their income
As you probably guessed, few seniors actually follow the guideline on replacement wages. The Social Security Administration found that 62% of retired workers lean on the program to supply at least half of their monthly income, with 34% reliant on Social Security for virtually all of their income (90%-plus). As you’ll see in an upcoming figure, overreliance on Social Security for your monthly income can be dangerous.
7. 4% of retired workers claim Social Security at age 70
Retired worker benefits can be claimed at age 62, or any point thereafter, with benefits growing by approximately 8% per year for each year that an individual holds off on taking their payout, up until age 70. Despite this dangling carrot of an incentive, a majority of retired workers claim benefits early (at or before age 64), thereby permanently reducing their monthly payout to less than 100%. Meanwhile, only 4% of retired workers wait as long as possible (age 70) to maximize their monthly payout. Interestingly enough, a recent study found age 70 to be the single best age to take Social Security benefits, albeit there’s still no one-size-fits-all claiming age for everyone.
8. About half of all senior households pay federal tax on their benefits
Ready or not, there’s a pretty good chance you’ll be paying federal tax on a portion of your Social Security benefits. If your modified adjusted gross income (MAGI), plus one-half of your Social Security benefits, exceeds $25,000, or $32,000 if you’re a couple filing jointly, you can be taxed on up to half of your benefits at the federal ordinary income rate. Further, using the same MAGI plus one-half benefits formula above, if you’re above $34,000 as a single filer, or $44,000 as a couple filing jointly, up to 85% of you benefits could be subject to federal taxation. Today, around half of all senior households owe tax on their benefits, according to The Senior Citizens League.
9. 13 states tax Social Security benefits
Here’s the “but wait, there’s more” moment. In addition to federal taxation, 13 states also tax Social Security benefits to some varied degree. Quite a few offer very generous income exemption levels, such as Missouri, where a single filer and couple can earn up to $85,000 and $100,000, respectively, before facing any state-level tax on their Social Security benefits. Even states that have mirrored the federal tax schedule are becoming a bit tax-friendlier. Nevertheless, if you live in one of these 13 states, you could be hit with double taxation on your Social Security payout.
10. 2035 is when the program could exhaust its asset reserves
Lastly, as promised, being overly reliant on Social Security could come back to haunt you. The newest annual Social Security Board of Trustees report estimates that the program’s nearly $2.9 trillion in asset reserves will be completely exhausted by 2035, with a number of demographic changes resulting in larger net-cash outflows with each passing year. Although Social Security won’t go bankrupt — its recurring sources of revenue prevent it from insolvency — the trustees’ report projects that, sans congressional involvement, benefits could be cut by up to 23% for retired workers in 2035 to ensure payouts through 2093. This is even more reason Social Security should be considered an ancillary, not primary, source of income during retirement.